Miners must treat cost-cutting carefully

NEWPORT Consulting managing director David Hand says miners need to be careful about what area of the business they cut costs from, warning they may need to learn to explore in the low commodity price environment if it continues.

Lauren Barrett
Miners must treat cost-cutting carefully

Speaking to at Diggers & Dealers yesterday, Hand said in these tougher times it was prudent that miners placed importance on efficiency and productivity.

“In today’s economic climate any miner saying, ‘well we’re not going to change anything here because the price of our commodity might go up in the next month’…they’re taking more risks than a miner taking action,” he said.

Newport is fresh from releasing its latest annual Mining Business Outlook report, which discovered that mining leaders in 2013-14 were primarily focused on cost-management, operational efficiencies, profitability, cash flow and improved productivity.

From interviews with about 60 mining executives in a range of private and publicly listed companies, 44% indicated they were reducing capital spending. It was the first time companies had stated definitively that they were reducing spending in the four years of undertaking the report.

In parallel with reducing capex, miners were axing staff in an effort to control costs, with close to one-quarter of those surveyed saying they would cut costs by reducing workforce numbers.

A raft of companies, from the big boys to smaller cap miners, have been announcing cost-cutting measures as a way to deal with lower commodity prices and the ongoing depressed market.

Hand said there were traps when it came to cost-cutting because some companies were not implementing initiatives where they were necessary.

“Just spending less money is not necessarily the answer,” he said.

“The answer for every mine is cost per ounce and cost per tonne, you can drive down cost per tonne/ounce by driving up production of tonnes/ounces.”

With a renewed focused on productivity at the top of mining leaders’ agenda, Hand said now was the right tight to turn attention to internal measures to maintain profitability.

“The only way to become more efficient is not to spend less on energy or to cut a shift, it’s to produce more in the time you have,” he said.

“The answer for mines in 2013 is to produce more from their existing operations.”

Hand said improvement in operational performance of mines was not a key focus for companies in the past few years, for one obvious reason.

“When the price of gold is $1800 an ounce, does it really matter if some drongo engineer keeps breaking a piece of equipment that costs a $1 million to fix?” he said.

“You just put an order in for another piece of equipment.”

Hand said companies needed to consider carefully what area of the business cost reductions would come from.

“Cost-cutting, if it’s the postponing of expenditure that I need to do to keep my mining operation operating at an optimum level, it will eventually cost in the long run,” he said.

Hand said it was only logical that companies splurged on exploration when prices were buoyant and cut back when prices were lower and cash availability was tight, but said at some point, explorers needed to come out of hiding.

“That sort of cost-cutting will eventually run out of its useful life and they will have to start exploring again,” he said.

“Cost-cutting as a way of getting through can only be temporary as at best a bet that commodity prices will only be low temporarily.

Hand said the question was whether firmer pricing for most commodities would return within the business cycle of some mining companies and operations.

“It’s a reasonable bet that prices will return before the music stops,” Hand said.

“But if it doesn’t, they need to find a way to do it [explore] with commodity prices where they are.”


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